Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.

Friday, August 30, 2013

“Real
[tax] simplification has eluded us because we have failed to address head-on
the public’s addiction to tax incentives as a means of providing social services
and funding government programs.Unless
we deal with that problem, real simplification is impossible.” – Thomas F.
Field (founder of Tax Analysts)

Right on, brother Thomas!

Have made progress on the GD extensions –
and still had time to wander the web.

Over the past few years I have occasionally
thought about this issue from a slightly different perspective – if I were just
starting out today would I still choose tax preparation as my profession?Especially in light such developments as the
IRS attempt to regulate all tax preparers, the continuing complexity and
changing of the Code, and the excessive due diligence requirements of the
Earned Income Credit.

My answer would probably be yes – and still
partly because of the seasonal nature of the job.I still enjoy preparing 1040s – the thrill is
not yet gone.

In my THE TAX PROFESSIONAL post “Ramblings on Tax Practice” I take a different position than Jason.I talk about limiting a practice to 1040
preparation, which I now do, instead of recommending “diversify and offer other accounting services”.

I am not as concerned as Jason is about DIY
tax preparation software and tax simplification taking away business.As I have said for years, I do not believe
that the creation of a much simpler 1040 would affect my practice, and I do not
know of any client who has ever left me to “self-prepare” his/her tax returns
using a box.

* Trish McIntire warns us that “6 Weeks Is Not That Much Time”.She is, of course,
reminding us of the October 15th deadline for filing extended tax
returns.

My recent bout with “manana disease” is a
clear indication that Trish speaks the truth.

“The
percentage of Americans who pay no federal income tax is falling, thanks to an
improving economy and the expiration of temporary Great Recession-era tax cuts.
In 2009, the Tax Policy Center estimated that 47 percent of households paid no
federal income tax. This year, just 43 percent will avoid the tax.”

Roberton points out (highlight is mine)-

“Of
the 43 percent of households that will owe no federal income tax this year,
nearly half will be off the rolls because their incomes are too low. The rest
won’t pay because preferences wipe out the taxes they would otherwise owe. Many of those preferences, such as the
Earned Income Tax Credit and the Child Tax Credit, are social policy run
through the tax code. If those provisions were considered spending rather than
tax cuts, many more people would be counted among income tax payers.”

I must continue to say that I do not accept
the statement that most of the now 43% actually pay federal taxes because they
pay FICA payroll taxes.FICA tax is not
really a tax.The Social Security
component is a contribution to a pension plan, and the Medicare part is an
advance health insurance premium.

“The U.S. Department of the Treasury and the
Internal Revenue Service (IRS) today ruled that same-sex couples, legally married in jurisdictions that
recognize their marriages, will be treated as married for federal tax
purposes. The ruling applies regardless of whether the couple lives in a
jurisdiction that recognizes same-sex marriage or a jurisdiction that does not
recognize same-sex marriage.”

Treasury
Secretary Jacob J. Lew explains –

“This ruling also assures legally married
same-sex couples that they can move freely throughout the country knowing that
their federal filing status will not change.”

The
press release points out –

“However, the ruling does not apply to
registered domestic partnerships, civil unions, or similar formal relationships
recognized under state law.”

Individuals who were in same-sex
marriages may, but are not required to, file original or amended returns choosing
to be treated as married for federal tax purposes for one or more prior tax
years still open under the statute of limitations.”

I
look forward to detailed posts on this new development from fellow tax bloggers
who have been blogging about same-sex marriages and taxes - which I will reference in the next BUZZ.

Wednesday, August 28, 2013

“Complexity
does not enter the tax code so much out of malevolence as through misguided
reform efforts and excessive demands made on tax laws as the vehicle for
implementing public policy.” – Sheldon D. Pollack (Professor of Law &
Political Science. University of Delaware)

I couldn’t let a week go by without some
BUZZ – so here is a special mid-week edition.

My experience as a young tax accountant
was, and is, different from Jamaal’s.I
do not now know, or actually ever known, many young tax accountants – other
than fellow tax bloggers like Jamaal and Jason Dinesen (whom I have actually
never met in person).During my 40+
years I have never “networked” or even socialized with other accountants (other
than those who I had known from high school or with whom I worked during my
brief tenure at Deloitte Haskins + Sells in the late 1970s) or tax pros, except
for recent associations with members of the NJ chapter.

I have been going to NATP conferences for
25+ years and I only went to the chapter luncheons at the last two I attended,
and have never gone to the formal end of conference dinner.I am always sociable and engage in conversation
with those sitting next to me at sessions, but have never attempted to “make
new friends” or interact with my fellow conference attendees after class.

I do believe, as JS has found, that many
CPAs, especially the younger, less experienced variety, feel unjustifiably
superior to non-CPA accountants and tax pros, who may very well be better
accountants and tax preparers than a lot of CPAs.

A few years back I was personally attacked online
by a tax blogger who thought CPAs walked on water.Thankfully this person has apparently disappeared
from the Tax Blogosphere.

“If
you haven't reviewed your credit report lately, you can get one free credit
report from each of the three agencies once a year at www.annualcreditreport.com.

If you discover an
error, your first step should be to contact the credit reporting agency in
writing to indicate that you are disputing the information contained on your
credit report. The credit reporting agency usually has 30 days to complete an
investigation of the disputed information. Once the credit reporting agency
investigation is complete, they must provide you with written results of their
investigation.”

* THE SLOTT REPORT discusses “IRA Contributions After Death”, including an issue concerning a spousal
contribution that I dealt with for a client this past tax season.

* The title of this Russ Fox post at
TAXABLE TALK caught my attention immediately – “Attorneys Behaving Badly”. It is not about a new reality tv piece of excrement,

He ends the post with (highlight is mine) -

“One
last remark regarding preparer regulation: Both individuals I’ve written about
are members of the Bar. Both subscribe to supposedly stringent ethics rules.
Clearly, both individuals were guilty of violating the canons of their
profession. The idea that just because
someone has a license bad behavior will vanish is, of course, foolish.”

“Saving
even a little money can really add up if you do it consistently. Consider ways
to free up more money to save for retirement--by reducing discretionary
spending, for example. And, put retirement ahead of competing goals, even
important goals like saving for your child's education.”

“New
York's attorney general sued Donald Trump for $40 million Saturday, saying the
real estate mogul helped run a phony ‘Trump University’ that promised to make
students rich but instead steered them
into expensive and mostly useless seminars, and even failed to deliver
promised apprenticeships.

Attorney General
Eric Schneiderman says many of the 5,000 students who paid up to $35,000
thought they would at least meet Trump but instead all they got was their
picture taken in front of a life-size picture of ‘The Apprentice’ TV star.”

Tronald Dump has screwed his investors
(didn’t he declare bankruptcy twice – without losing any of his own money), so
why not his “students”.

Whenever legitimately criticized for his
actions, this fool does not respond to the issues of the criticism but instead takes
personal shots at his “criticizer”.When
Rosie O’Donnell seriously criticized a Trump action, with legitimate comments
on his actions, his response was “Rosie is fat”!

What intelligent person would sign up for a
“Trump University” in the first place?Or want their picture taken with Trumpster?

* The TAX FOUNDATION’s “Monday Map” shows “Migration of Personal Income”, which “illustrates
the interstate movement of income over the past decade (from 2000 to 2010)”.

The biggest losers are high-tax states like
NY, NJ, CA, and IL.The winners are
low-tax states like FL, TX, and AZ.I
would certainly never move to these too-hot states regardless of my tax
situation.I was surprised that PA was
also a loser - #40 on the list.

As I have mentioned before, my move to PA
was motivated by savings in health and auto insurance (almost 50%) and
occupancy costs, and other personal considerations, and not by state tax
savings – although the real estate and sales taxes are less than I would pay in
NJ.

“Members
of Congress sometimes reveal a dangerous degree of ignorance on vitally
important issues they have considerable power to regulate.”

“Politicians
manipulate voters every day with half-truths—or outright lies—about taxes,
spending, and many other issues that directly affect the nation's prosperity.”

What is wrong with Congress?They are self-absorbed idiots, incapable of
independent thought, whose primary concern is keeping themselves, and members
of their party, in office and certainly not the proper administration of the
government or the interests of the American public.

“In a
brief, the Justice Department argued leaders of an atheist group may qualify
for an exemption. Buddhism or Taosim don't include a belief in God and are
considered religions, the government's lawyers argued, so why not atheism?”

“The
burden of proving you qualify for the programs rest with you and you need to
keep records.

It doesn’t matter
if you might qualify for a credit or deduction or need to show that withdrawals
are for educational expenses, you need to be proactive about keeping records.
Don’t rely on the 1098T that the college will send out. Schools have gotten more
accurate completing the 1098T but they can be misleading.”

To be honest, I have found that more often
than not the Form 1098T is as useful as tits on a bull!

Trish ends with -

“Believe
me; it’s better to put the info aside as you get it than to try to find it in
February.”

I certainly do believe Trish, and echo her
words.This does not just apply to
education expenses – but to any deductible expenses.

Wednesday, August 21, 2013

The recent issue of
NATP’s TAXPRO MONTHLY discussed David P and Veronda L Durden v Commissioner (TC Memo 2012-140).This was another case where the Tax Court
upheld the IRS disallowance of a legitimate charitable contribution made to a
qualified charity because the taxpayers did not comply with the strict letter
of the law.

In 2007 the taxpayers
did legitimately donate over $20,000, in several separate contributions of more
than $250, to a qualified 501(c)(3) organization eligible to receive
tax-deductible donations.

The taxpayers were
audited in 2009, and produced cancelled checks and a statement from the church,
dated January 10, 2008, that documented the full amount they had deducted.Unfortunately the statement from the church
did not specifically indicate that no goods or services, other than intangible
religious benefits, were provided in exchange for the donation, and was
therefore not accepted by the IRS.

The couple obtained a
second statement from the church, dated June 21, 2009, that clearly indicated
that no goods or services were provided.But the IRS ignored this second statement because it was not “contemporaneous”
– i.e. received from the done organization before the earlier of the date the
original tax return is filed or the extended due date of the tax return.

The first letter,
dated January 10, 2008, was contemporaneous but did not contain the requirement
statement.The second letter, dated June
21, 2009, contained the required statement but was not contemporaneous.

I do agree it is right
to require proper documentation to support a charitable deduction.Before the stricter rules that require a
hard-copy receipt for every single dollar contributed to a church or charity in
order to claim a tax deduction on Schedule A I would venture a guess that at
least 50% of all charitable deductions claimed on Schedule A each year were at
least slightly overstated.And I do
believe that recipient organizations should be required to verify that no goods
or services were provided in exchange for the donation.But I draw the line at this strict adherence
to a “contemporaneous” statement.

If the taxpayer can provide
proper documentation that the money was actually given to the charity, via
cancelled checks, and that it was an
actual charitable donation, via an acknowledgement from the charity, and the charity confirms to the IRS or
the Tax Court either in writing or by oral testimony that no goods or services
were provided, the deduction should be allowed.The written statement that no goods or services were provided, if not
contemporaneous, should be allowed to be provided, under penalty of perjury,
either during the audit or in court.

I do understand, and
know full well, that cancelled checks by themselves are not sufficient proof
that a donation was actually made.

I am reminded of the
tale of the church member who approached his pastor one Sunday after the
service.The member told the pastor that
he noticed there was a lot of loose cash in the collection plate each week,
which would be kept in the church overnight before counting and depositing, and
that he, as a retail business owner, needed lots of cash at the beginning of
each week for his cash register.He
proposed that after the service each Sunday he write a check to the church in
exchange for all the loose paper bills in the collection plate.This way the church would not have excessive
cash in its office overnight and he would have extra cash for use at his retail
location – a benefit for both parties.

Each week the
businessman would write a personal check to the church for $100-$200 and take
the cash home with him.On his tax
return he claimed a deduction for the total of all the checks he wrote to the
church for the year.

{I have told this
story to prove a point, and not to suggest a way to cheat on your taxes!}

So it is better to
have both cancelled checks and an
independent individual or cumulative receipt or statement, regardless of the
amount of each separate contribution.

Do you agree with me
that the Tax Court decision, while legally appropriate, was basically wrong in
this and other similar cases, and that “non-contemporaneous” statements
regarding the receipt of goods or services should be acceptable?

I submitted a comment about the program, in
which I referred to NJ politicians as “cafones”.PJR asked me to explain what I mean by
“cafone”, and I replied -

“I
was told by my mentor many, many, many years ago that it meant a simpleton, and
that is how he used it. But apparently it has come to mean “an uncouth person
or lowlife” in American slang.

I think when it
comes to NJ politicians lowlife is appropriate – ‘a person who is considered
morally unacceptable by their community, especially those who exploit others
for their own selfish purposes’.”

For that matter lowlife is also an
appropriate description of the idiots in Congress.

The reader wants to know if filing an
extension will increase your chances of an audit, and the answer is no.It is also an “urban tax myth” that extending
your return and filing it in October will reduce your chances of an audit.A return is chosen for audit based on the
information reported on the return, and not when it is received by the IRS.

“Bayonne
is launching the Shop Bayonne Property Tax Reward Program this week as part of
an effort to encourage Bayonne residents to shop locally.

The program
provides property tax credits for homeowners and rebate checks for renters
every time they patronize local participating merchants.

Rebates and tax
credits will be determined by each business separately and can be a percentage
or a dollar amount based on the price of the product or service.”

It actually sounds like a good idea.

* The IRS has a page on “Identity Protection” where “you will find a wide
range of information. Depending upon your personal circumstances, the
information found here will cover a variety of scenarios involving identity
theft, ranging from contacting us with a case of identity theft to providing
tips to help keep your records safe.”

Monday, August 19, 2013

What the idiots in
Congress fail to do when they add “tax expenditures” to the Tax Code is take
into consideration the special record-keeping requirements that apply to
specific deductions and credits.

Thankfully they did
recently require basis reporting on Form 1099-B.Surprisingly, for Congress, that was a step
in the right direction.

Here is one example –

Interest on home
equity debt (money not used to buy,
build, or substantially improve real estate) is deductible only on principal up
to $100,000.Form 1098 is used to report
mortgage interest paid, but it does not differentiate between acquisition debt
and home equity debt.The taxpayer must
internally keep track of the difference between their home equity debt and home
equity debt over the life of the debt.

This is easy if there
is one acquisition mortgage and one separate home equity line of credit, and
never the twain shall meet.But in
reality, taxpayers refinance and consolidate debt multiple times, often more
than once in a single year, co-mingling acquisition and home equity debt, and
the treatment of closing costs on mortgage refinance or consolidation is an
issue.I do not personally know of one single
taxpayer who keeps records of the separate allocation of acquisition debt and
home equity debt.

I would expect that as
much as half of the Schedule A deductions for mortgage interest could be
incorrect – due to complexity and not intentional fraud.

In rewriting the Tax
Code the idiots in Congress must take into consideration the real world
requirements of complying with whatever “tax expenditures” they deem
appropriate to keep.

I have recommended limiting the mortgage interest deduction to
acquisition debt on a principal primary residence. This would require special
new rules and regulations for banks and mortgage companies for issuing
home-secured loans.

For example -

A “mortgage” loan would only be permitted for “acquisition
debt”. Interest on a “mortgage” for a taxpayer’s primary personal residence
would be fully deductible, up to the current acquisition debt limitations.
“Home equity debt” would have to be a totally separate loan, and interest on
this type of loan would not be deductible. A Form 1098 would only be issued for
interest paid on a “mortgage” loan, and the bank or mortgage company would be
required to report only interest paid on up to $1 Million of principal, and
indicate if the mortgage was secured by a primary personal residence.

One would not be able to refinance a home-secured loan to
include both types of debt in one loan. Therefore a homeowner could not
refinance a “mortgage” to get additional money in hand unless he/she could
substantiate to the lender that the money is used to “substantially improve”
the secured residence. One would have to refinance the “mortgage” for the exact
same principal, adding perhaps related closing costs, and take out a separate
“home equity” loan to get any money in hand.

By instituting these requirements as part of federal law a
taxpayer, or his/her preparer, would truly be able to just take the amount of
mortgage interest reported on the Form 1098 for the primary personal residence
and transfer it to Schedule A.

While this is what the idiots in Congress “should” do – remember
that they are idiots, and lazy idiots at that, so don’t hold your breath.

“The
federal retirement benefits agency announced on Aug. 10 that, in response to
the Supreme Court ruling invalidating the Defense of Marriage Act (DOMA), it is
now processing claims for those in same-sex marriages.

But, and it's a big
but, Social Security is only issuing benefits for claims by residents of states
where same-sex marriages are legal.”

“ . .
. having a license cannot stop bad behavior. And second, the government has
methods today of stopping tax preparers who are breaking bad. As the DOJ noted
in their press release, ‘In the past decade the Justice Department Tax Division
has obtained injunctions against hundreds of tax preparers’.”

A
driver was stuck in a traffic jam on the highway outside Washington, DC.Nothing was moving. Suddenly, a man knocks on the window.

The
driver rolls down the window and asks, "What's going on?"

"Terrorists
have kidnapped the entire US Congress, and they're asking for a $100 million
dollar ransom. Otherwise, they are going
to douse them all in gasoline and set them on fire.We are going from car to car, collecting
donations."

Thursday, August 15, 2013

The Max and Dave “clean slate” approach to tax reform, which I
wholeheartedly support, begins by eliminating all “tax expenditures”.The new Tax Code begins “everything is
taxable” and “nothing is deductible” and adds back only those “excepts” (exclusions,
deductions, and credits) that are absolutely necessary.

A recent BUZZ installment referenced “Homeownership Tax Deductions, Credits and Exemptions” from REAL ESTATE METRO.It listed the many “tax expenditures” related
to home ownership.Topping the list were
the deductions for real estate taxes and mortgage interest.

The Office of Management and Budget reports that for 2012 the
deduction for mortgage interest “cost” $87 Billion and the deduction for state
and local taxes cost $33 Billion.

“Two criticisms are that
it is mostly claimed by upper-income taxpayers, and that it softens people's
opposition to high taxes and wasteful spending by local governments, because
some of those taxes can be written off at the federal level.”

I support keeping the deduction for state and local income
taxes, and real estate taxes and “acquisition debt” mortgage interest on a
principal personal residence (owner-occupied housing).But my
reason is not to encourage home ownership.

The Internal Revenue Code taxes Americans based on income
measured in pure dollars. However it is a fact that the “value” of one’s level
of income differs, sometimes greatly, based on one’s geographical location. A
family living in the northeast or California that has an income of $100,000-200,000
(apparently considered “upper-income taxpayers”) may be just getting by, while
a similar family that resides in “middle America” lives like royalty on the
same level of income. Many components of the Tax Code are indexed for
inflation, but nothing is indexed for
geography. To be honest I have no idea how one would even begin to index
for geography.

It costs an awful lot to live in, for example, New York,
certainly New Jersey, Connecticut, Massachusetts, and California. State and
local income and property taxes are the highest in the country. The cost of
real estate is also excessively high. As a result one must earn a lot more
money to be able to live in these states – and salaries are arbitrarily
increased to reflect the increased cost of living. Yet $150,000 in income is
taxed by the federal government at the same rate in New York City as it is in
Hope, Arkansas.

Real estate and state and local income taxes and the cost of a
home, and therefore also the amount of “acquisition debt” mortgage interest
paid on a residence, are higher in the Northeast, and California. Since we pay
taxes on “net income” after deductions, allowing
an itemized deduction for these items would help to somewhat geographically
“equalize” the tax burden.

I do believe that the itemized deduction for real estate taxes
and mortgage interest on secondary personal residences and the itemized
deduction for “home equity” mortgage interest (not used for “substantial” home
improvement) should be eliminated.

I have never seen the issue of “geographic equalization”
discussed anywhere else, and would like to hear from others on this issue.Please
comment on this post!

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AIN'T THAT THE TRUTH!

DONALD T RUMP HAS NOT DONE A SINGLE THING THAT IS "APPROPRIATE" OR "ACCEPTABLE" FOR A CANDIDATE OR A PRESIDENT SINCE THROWING HIS HAT INTO THE RING.EVERY SINGLE DAY TRUMP PROVIDES MORE PROOF THAT HE IS AN IGNORANT, SELF-ABSORBED, UNFIT, MENTALLY UNSTABLE IDIOT, AND A DEPLORABLE AND DESPICABLE HUMAN BEING.TRUMP MUST BE REMOVED FROM OFFICE FOR MENTAL INCOMPETENCE ASAP! PLEASE READ AND SHARE THIS - THE TRUTH ABOUT TRUMP'S MENTAL CONDITION

Donald T Rump has not done a single thing that anyone with intelligence would consider “appropriate” or “acceptable” for a President since deciding to run for office.

Every single day Trump provides more proof that he is an ignorant, self-absorbed, unfit, mentally unstable idiot, and a deplorable and despicable human being, who must be removed from office ASAP.

VERY IMPORTANT -

(1) Before contacting me with questions about how a blog post relates to your specific situation, please be aware that I do not give free tax advice to non-clients by e-mail, comment response, or phone. So don't waste your time and mine.

(2) I am winding down my tax practice, and I will not, under any circumstances, accept any new clients. Period. I am actually trying to "thin the herd".